Independent Watchdogs Can Improve Fiscal Performance

More than half of twenty-nine existing fiscal councils established since the crisis

Fiscal councils aim to promote sustainable public finances through greater transparency and a more-informed public debate, and are associated with stronger fiscal performance in the countries where they operate.

As countries struggle to maintain or restore fiscal credibility following the crisis, a new study by IMF staff takes stock of policymakers’ growing interest in establishing fiscal councils to complement fiscal rules and analyzes their effectiveness. Fiscal councils are independent public institutions that through their work aim to strengthen governments’ commitments to sustainable public finances.

Fiscal policy rules, which impose numerical limits on budgetary aggregates such as deficits, debt, or government spending, have often been the solution used to tackle out-of-control deficits and rising debt. However, these rules have limitations that can undermine their credibility. In particular, fiscal rules can be inflexible in the face of adverse economic shocks, leading policymakers to suspend or even abandon them.

Fiscal councils can be set up to help address some of the shortcomings of fiscal rules. Based on existing experience, fiscal councils appear to encourage greater fiscal discipline by fostering fiscal transparency and stimulating a productive public debate on fiscal issues. Greater accountability makes it less likely that governments renege on their commitment to maintain a sustainable fiscal position.

Growing number of fiscal councils

The number of fiscal councils surged after 2005, reaching 29 by the end of January 2013 (see chart). Prominent examples of fiscal councils include long-established institutions such as the Congressional Budget Office in the United States and the Central Planning Bureau in the Netherlands, as well as recent institutions such as the Parliamentary Budget Office in Canada and the Office for Budget Responsibility in the United Kingdom. A number of emerging and frontier economies have also recently established fiscal councils (notably Chile, Kenya, and South Africa).

“An important finding of the study is that countries often use fiscal councils to complement the discipline-enhancing role of fiscal policy rules, not as a substitute for them. About 80 percent of countries with fiscal councils also have numerical fiscal rules; and the councils in these countries often monitor compliance with fiscal rules,” said Xavier Debrun, who led the team of economists from the IMF’s Fiscal Affairs Department.

Proper design is key

The study also highlights that only well-designed institutions can foster fiscal discipline. “Key features for effective fiscal councils include a strict operational independence from politics, the provision or public assessment of budgetary forecasts, a strong presence in the public debate, and an explicit role in monitoring fiscal policy rules. Macroeconomic and budgetary forecasts are more accurate and less biased in countries where fiscal councils have these key features,” said Tidiane Kinda, one of the study’s co-authors.

Existing fiscal councils cover a wide variety of possible institutional forms and the usefulness of a council is not limited to any specific political system. “One size does not fit all in the design of fiscal councils and each institution should reflect country-specific characteristics, such as available human and financial resources, political traditions, and the specific causes for excessive deficits and debt,” said Teresa Curristine who led the preparation of the country case studies.

Main Building Blocks of an Effective Fiscal Council

Mandate

There should be no ambiguity on the fiscal council’s duties and scope of responsibilities.

Independence

Strict guarantees against political interference are essential for new institutions. Predictable funding commensurate with the council’s mandate is necessary.

Influence

Regardless of the chosen governance structure (committee or single person), the council should speak with one voice. Influence rests on the council’s freedom to communicate its messages and analysis to the general public.

Accountability and Transparency

The right balance must be struck between guarantees on independence on the one hand, and explicit transparency and accountability requirements on the other.

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